Analysts mildly bearish on crude prices

Published 6:03 am, Friday, January 24, 2014

By Mella McEwen

mmcewen@mrt.com

Analysts with Sterne Agee have forecast a more bullish price outlook for natural gas while turning slightly bearish on expectations for crude oil prices.

In updating their forecast, analysts bumped their outlook for West Texas Intermediate to a range of $88 to $93 per barrel in 2014-2015, down from their earlier forecast of $90 to $96 per barrel. At the same time they've nudged up their forecast for Brent crude to $98 to $104 a barrel from $96 to $103 a barrel and expect a WTI-Brent differential of $11 a barrel this year and a $10 barrel differential in 2015.

The analysts cite the volatility of crude price differentials in various producing regions and caution investors to review cash unit margins. "While oil-focused coverage companies remain well-hedged, margins remain an important indicator of resiliency," they write. "Our work suggests many oil-focused operators have $50-plus a barrel cash unit margins that can absorb negative crude pricing shocks, and should provide visibility on spending in an $80 a barrel crude price environment versus our $96 a barrel WTI forecast for 2014.

That regional crude pricing volatility is why they forecast wider differentials, they explained, noting that Louisiana Light Sweet and California crude prices "dislocated" from Brent crude pricing trends in the fourth quarter of 2013 and have only partially recovered, while Clearbrook and WTI Midland prices showed periodic basis blowouts. The analysts expect that volatility to persist "as an overwhelmed crude pipeline system and an increasingly dangerous rail system struggles to accommodate continued production growth from the oil shales."

"We expect events that are likely to impact realizations, such as refinery turnarounds, pipeline leaks, rail-car accidents, and weather disruptions to be the norm, not the exception in the indefinite future," they write. "We remain skeptical that crude by rail remains the longer-term Holy Grail for geographically disadvantaged crude, in light of collapsing waterborne crude benchmarks and continued railcar accidents. Unfortunately, we believe it is only a matter of time until a major population center in the U.S. faces a major incident from crude being transported by rail, similar -- albeit much smaller in scale, hopefully -- to the crude train fire in Quebec last summer that killed 47 people.

"We note that at last count, there have been six incidents involving crude tanker cars derailing/exploding in North America since last July, including an incident on Jan. 20 involving a crude oil train car derailing and almost toppling off a bridge into the Schuykill River in Philadelphia," they added.

While the analysts have turned slightly bearish on crude pricing, they have become more bullish on natural gas prices, raising their forecast for natural gas by 6 percent to $4.25 per Mcf in 2014 from $4 per Mcf and to $4.40 per Mcf in 2015, up 4 percent from $4.25.

Three main drivers are cited in strengthening natural gas prices, the Sterne Agee analysts said.

One is increasing natural gas exports to Mexico as several natural gas pipelines and associated compression projects could help increase exports to Mexico from 1.7 billion cubic feet per day in 2012 to over 5 Bcf in 2015.

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A second driver is the fact that, as the analysts note, "LNG exports now look more like a 'when' than an 'if.'" Their skepticism that LNG exports would begin on schedule has been overcome by the fact Cheniere Energy appears to be on schedule to begin liquefaction from their first two contacted liquefied natural gas trains by the end of 2015.

Finally, they said, the frigid weather much of the country has been seeing may finally be providing the "Hail Mary drawdown" of natural gas in storage that natural gas operators have been seeking. They note that two of the biggest weekly drawdowns from storage on record have been seen this winter, one during the week of Dec. 13 and one during the week ending Jan. 10.